Army to end its exclusive deal with Halliburton

Griff Witte

WASHINGTON - The Army is discontinuing a controversial multibillion-dollar deal with oil services giant Halliburton Co. to provide logistical support to U.S. troops worldwide, a decision that could cut deeply into the firm’s dominance of government contracting in Iraq.

The choice comes after several years of attacks from critics who saw the contract as a symbol of politically connected corporations profiteering on the war.

Under the deal, Houston-based Halliburton had exclusive rights to provide the military with a wide range of work that included keeping soldiers around the globe fed, sheltered, and in communication with friends and family back home.

Halliburton spokeswoman Melissa Norcross, in a prepared statement, said Tuesday “it is neither unusual nor unexpected that the (logistics) contract may be replaced with another competitively bid approach, as previous iterations of this contract vehicle have experienced.”

Since the company was awarded the current contract in December 2001, “we have been open and forthcoming that this work may be modified or replaced at any time during the term of the contract.”

The contract included one base year with nine option years.

The Army says it will not be picking up the next option year and instead plans to put out a new request for proposals by the end of the month. It expects to announce winners in November.

Halliburton may bid again
The Pentagon’s new plan will split the work among three companies, to be chosen this fall, with a fourth firm hired to help monitor the performance of the other three.

Halliburton may bid on the work “if the company determined it was a good business opportunity,” Norcross said.

The bidding is likely to attract some high-profile suitors, including weapons makers Lockheed Martin Corp. and Northrop Grumman Corp.

“These are huge contracts. They are among the biggest government services contracts that have ever been created,” said Loren Thompson, chief operating officer of the Lexington Institute, a think tank.

“Most of the big, integrated defense contractors recognize that new sales of military hardware are going to be hard to come by in the years ahead. There’s a general migration to services. And no contract on the horizon is bigger in services than LOGCAP. It’s just too big to ignore.”

The logistics work is performed through a subsidiary, Kellogg Brown & Root Services Inc. Last year, the Army paid the company more than $7 billion under the contract, according to a seach of government contracting data by Eagle Eye Inc., a private consulting firm. The number this year is expected to be between $4 billion and $5 billion, according to Randy King, a program manager with the Army.

Known formally as the Logistics Civil Augmentation Program, or LOGCAP, the contract “has expanded beyond what anyone could have imagined,” said Dov Zakheim, the Pentagon’s comptroller from 2001 until 2004 and now a vice president at consulting firm Booz Allen Hamilton.

“The KBR people themselves would point out that the challenges they had coming out of Iraq, over and above everything else they had to do, were taxing their systems. You’re really asking too much of one firm to be able to manage all of this.”

Costs were questioned
Government audits turned up more than $1 billion in questionable costs. Whistle-blowers told how the company charged $45 per case of soda, double-billed on meals and allowed troops to bathe in contaminated water.

Halliburton officials have denied the allegations strenuously. Army officials Tuesday defended the company’s performance but also acknowledged that reliance on a single contractor left the government vulnerable.

The decision on Halliburton comes as the U.S. contribution to Iraq’s reconstruction begins to wane, reducing opportunities for U.S. companies after nearly four years of massive payouts to the private sector.

For some time, Halliburton’s financial results have been reflecting a reduction in military spending.

During the first quarter, Halliburton’s Government & Infrastructure business — which included work under the LOGCAP contract — generated $1.7 billion or a third of the company’s total revenues. That was down 17 percent from the same period a year ago.

Government & Infrastructure also accounted for only $20 million of Halliburton’s $755 million in operating income during the first quarter.

Of the more than $18 billion Congress allocated for reconstruction in late 2003, more than two-thirds has been spent and more than 90 percent has been contractually obligated, according to the inspector general’s office overseeing reconstruction work. The rest of the money, which is collectively known as the Iraq Relief and Reconstruction Fund, needs to be obligated by the end of September.

Contracts to expire
Army spokesman Dave Foster said in a written response to questions that funding for 11 contracts covering various aspects of reconstruction — including transportation, communications, water distribution and the electric grid — will expire this fall.

While the contractors will be allowed to finish any work previously requested, no new work can be ordered after September.

Among those contracts is another Halliburton deal — up to $1.2 billion to restore oil services in Iraq’s south. As with the others, it will not be extended.

“The Iraq reconstruction is winding down … so there is no need for new contracts to replace the existing,” Foster said.

Instead, the Iraqi government will have to find its own contractors to do the work, which includes tackling a large number of projects left undone by the United States.

“This is the year of transition for Iraqi reconstruction. The U.S.-funded projects are being completed and transferred to Iraqi management and control,” said James Mitchell, spokesman for the inspector general’s office.

That office has repeatedly warned of a “reconstruction gap” between what the United States promised in rebuilding the country after the spring 2003 invasion and what it has delivered. For instance, a contract aimed at yielding 142 new health centers across Iraq instead produced a mere 20 before the program ran out of money.

A defining role in Iraq
The heavy involvement of U.S. contractors in Iraq has been one of the defining features of the U.S. presence there, with private companies called on for duties including guarding supply convoys and analyzing intelligence.

No contractor has received more money as a result of the invasion of Iraq than Halliburton, whose former chief executive, Dick Cheney, is now vice president.

The company maintains that its billing disputes with Defense Department auditors have been resolved and that its work has received rave reviews from the military.

“By all accounts, KBR’s logistical achievements in support of the troops in Iraq, Kuwait and Afghanistan have been nothing short of amazing,” Norcross said.

Army official King agreed Tuesday.

“Halliburton has done an outstanding job, under the circumstances,” King said. But he added that Pentagon leaders ultimately decided they did not want to have “all our eggs in one basket” because multiple contractors will give them better prices, more accountability and greater protection if one contractor fails to perform.

When Halliburton won the contract in December 2001, it was relatively modest in size, but stubborn insurgencies in both Iraq and Afghanistan have stretched U.S. troops and kept Halliburton busy meeting their needs.

Rep. Henry Waxman, D-Calif., a frequent Halliburton critic, said he would like to see even more companies included as winners in order to maximize competition for work.

But he welcomed the move away from the exclusive contract with Halliburton as a good first step.

“When you have a single contractor, that company has the government over a barrel,” Waxman said. “One needs multiple contractors in order to have real price competition. Real competition saves the taxpayer money.”

Chronicle reporter David Ivanovich contributed to this report.